PAT Introduction to Market Integration Analysis Session 4.2. WFP Markets Learning Programme Price Analysis Training

Learning Objectives By the end of this session, participants should be able to:  Explain concept and definition of – and importance of analysing – market integration  Explain the possible implications of poorly integrated markets for food insecurity, vulnerable households, and WFP programming/response options including local procurement of food commodities  Analyse a graph and determine the degree to which prices move/do not move in tandem across markets to ascertain whether those markets are/are not integrated  Calculate average of price differences between markets in a given period WFP Markets Learning Programme Price Analysis Training

 Markets and Food Security  Defining Market Integration  Determinants of Market Integration  Implications of Market Integration for Food Security  Measuring Market Integration Content Key Areas of Session Focus WFP Markets Learning Programme Price Analysis Training

WFP Markets Learning Programme Price Analysis Training Quick Case: Pakistan Earthquake and Market Integration Task: Read the Quick Case and, with a partner, answer the questions below. Quick Case: Large wholesale markets in Rawalpindi & Islamabad remain well integrated with secondary & tertiary (retail) markets in less affected urban and semi-urban areas. Major issues confronting affected urban populations are food access & lack of cash reserves. Most appropriate response for urban populations with functional & rapidly recovering markets is non-food response. Localized food availability and food access are primary concerns for remote rural populations, where previously well-integrated markets remain temporarily disconnected until roads are reopened, infrastructure is repaired, and credit and supply chains are restored. Replacement of in-kind relief for cash in rural areas after the next harvest when transport corridors reopen and market infrastructure and supply chain linkages are restored should be considered. Little evidence of market recovery or capacity to resume normal market function was observed in Balakot, a severely damaged area. Questions: According to the case, what is the situation of markets in the larger urban areas? What factors likely account for this? What is the situation of the more remote, rural markets in the case? What factors likely account for this? Adapted from: Nyberg, Jennifer, “Pakistan Market Assessment – Earthquake Affected Areas”, WFP, 2005.

WFP Markets Learning Programme Price Analysis Training  Market integration matters:  This is where we see the linkages between availability and access… Markets in Food Security Analysis

Food Access Markets in Food Security Analysis A Simplified Framework HH CASH AVAILABILITY Transfers Remittances Loans Food aid Commercial imports Agricultural inputs Extension Microfinance Food production Non-food production Employment HH Assets National food production and stocks WFP Markets Learning Programme Price Analysis Training Market Food Availability Markets Food Security Markets are more concerned with food availability and access than food utilization

What is Market Integration? The existence of trade flows: the movement of food in response to supply/demand imbalances Market integration allows price signals to be transmitted from one market to another Impact on HH Food Security of market integration? When markets are integrated, prices become more stable: then HH FS is likely to be improved, as poor HHs can obtain food at more affordable prices WFP Markets Learning Programme Price Analysis Training

Implications: Food Market Integration? (1) Market Integration and Food Security  Trade flows between areas cancel out food deficits under two conditions: Positive correlation between prices & level of food deficit Stable and low real food prices are good for net food buyer, poor, vulnerable and food insecure households Drèze and Sen 1989 WFP Markets Learning Programme Price Analysis Training

WFP Markets Learning Programme Price Analysis Training Price patterns reflect food deficit situation Real Price of Millet and Per capita Production Year Lagged per capita productionReal price, Maradi, Niger

Implications: Food Market Integration? (2)  Avoid localized food shortages  Identify areas of effective economic policy impacts  Inversely, market segmentation protects against competition and external market instabilities WFP Markets Learning Programme Price Analysis Training

Implications: Food Market Integration? (3)  Indicator of food availability: trigger local purchases and cash & voucher for food assistance.  Improve effectiveness of program interventions such as local purchases and cash & voucher.  Optimize the level of food aid required.  Non-integration implies targeted food aid. WFP Markets Learning Programme Price Analysis Training

Implications: Food Market Integration? (4) Risks of Decision-Making without Market Integration Analysis If markets are integrated: General food distribution: Impact on prices: price decreases on all markets Changes in relative prices: price distortion & increased uncertainty Cash Transfer Impact on prices: price increases on all markets; Changes in relative prices : price distortion & increased uncertainty  Impacts can be observed relatively quickly if markets are integrated. WFP Markets Learning Programme Price Analysis Training

Implications: Food Market Integration? (5) Risks of Decision-Making without Market Integration Analysis If markets are not integrated: General food distribution: Impact on prices: Price decreases in areas of distribution, but no change elsewhere unless food aid creates trade (e.g. Sudan) Large scale distributions => trade diversion & price decreases on all markets Changes in relative prices: 1.Price convergence, if food aid does not create trade between areas 2.Market integration, decrease in spatial price differentials. WFP Markets Learning Programme Price Analysis Training

Implications: Food Market Integration? (6) Risks of Decision-Making without Market Integration Analysis If markets are not integrated: Cash transfer: Impact on prices: Price increases in cash distribution areas, if there are no trade flows between areas General price increases. Changes in relative prices : Price distortion (hoarding) if cash transfer does not create incentives for trade between regions Increased spatial price differentials if cash transfer creates trade (high transaction costs). If markets are not integrated => ambiguous impacts on price changes. WFP Markets Learning Programme Price Analysis Training

What Determines Market Integration? (1) Key determinants of market integration: Real prices (nominal  CPI) Trade flows Transaction costs (transport, margins, risk premium, information cost…) WFP Markets Learning Programme Price Analysis Training

WFP Markets Learning Programme Price Analysis Training Quick Quiz Questions: What are likely impacts on food prices (a) in Centreville, Marketastan and (b) in Nordesian border towns of a massive Northern Province GFD? Who is likely to benefit/lose because of the GFD? Background: Very little integration of Northern Province markets with rest of Marketastan. More integration with neighboring Nordesian border town markets.  WFP and partners discussing massive general food distribution throughout Northern Province for earthquake disaster affected. Answer: (a) Little or no impact on Centreville prices (b) Possible price decreases in Nordesian border towns Earthquake-affected HHs likely to benefit – from low prices (and from food). Income of small producers and traders in Northern Province and along Nordesian border likely to fall.

What Determines Market Integration? (2) Factors influencing market integration / segmentation: Distance between markets Trade infrastructure (transport, communication/telephone, credit, roads…) Policies (e.g. tariffs, movement restrictions, exchange rate policy…) Labor market functioning, production/productivity failures (e.g. drought, inputs availability…) WFP Markets Learning Programme Price Analysis Training

Measuring price differentials Analyst must try to measure transaction costs…why?  When transaction costs > the price differential between 2 markets, then traders have little or no incentive to move food. WFP Markets Learning Programme Price Analysis Training Market A Market B Diff T110.5 T223 T334 Total67.5 Ave If transactions costs are <.5/unit, then food is likely to move

What happens when transfer costs are too high Traders try various strategies to minimise transaction costs. WFP Markets Learning Programme Price Analysis Training A similar strategy…that didn’t work too well!

How to Measure Integration between Markets? Correlation Coefficient  The degree to which variables (e.g., price series) are related  Can be linear, non- linear, positive, negative.  Value: always between -1 and 1 WFP Markets Learning Programme Price Analysis Training Close to 1: strong positive correlation Close to -1: strong negative correlation Close to 0: weak (or no) correlation Strong positive correlation between price series of different areas is indicative of potential spatial market integration

How to Measure Integration between Markets? 2. Signs of Correlation Coefficients  Positive Correlation Simultanous increase or decrease of variables  Negative Correlation Increase or decrease of one variable concomitant with opposite change of the other  No Correlation Change in one variable not related to the change of the other. WFP Markets Learning Programme Price Analysis Training

How to Measure Integration between Markets? 3. Correlation and co-movement  Co-movement positive correlation or similarity of patterns  But: co-movement does not measure the degree of the relationship  Co-movement illustrated graphically to provide a feeling of potential correlation between variables WFP Markets Learning Programme Price Analysis Training

Illustration of price co-movement WFP Markets Learning Programme Price Analysis Training

Illustration of Correlation Coefficients - Niger WFP Markets Learning Programme Price Analysis Training Niger Nigeria Agadez /milDiffaDossoMaradiTahouaTillabériZinderNiameyIllelaJibia Agadez /mil 1 Diffa Dosso Maradi Tahoua Tillabéri Zinder Niamey Illela Jibia Niger Nigeria Agadez /milDiffaDossoMaradiTahouaTillabériZinderNiameyIllelaJibia Agadez /mil 1 Diffa Dosso Maradi Tahoua Tillabéri Zinder Niamey Illela Jibia

Niger: Before CFA Franc Devaluation in 1994 WFP Markets Learning Programme Price Analysis Training Agadez / Mil DiffaDossoMaradiTahouaTillabériZinderNiamey Agadez/Mil 1 Diffa Dosso Maradi Tahoua Tillabéri Zinder Niamey

Niger: After CFA Franc Devaluation in 1994 WFP Markets Learning Programme Price Analysis Training Agadez / Mil DiffaDossoMaradiTahouaTillabériZinderNiamey Agadez/Mil 1 Diffa Dosso Maradi Tahoua Tillabéri Zinder Niamey Higher post-devaluation coefficients may reflect: Increased costs for Niger traders of doing business in Nigeria More focus on domestic, internal trade Greater domestic competition with more entrants into domestic markets …and therefore greater integration of domestic markets.

Using the =CORREL function WFP Markets Learning Programme Price Analysis Training

How to Measure Integration between Markets? 5. Limitations of Correlation Coefficients Difficult to interpret! Coefficients may be high – even without market integration: This could be due to: o Common factors: inflation, population, climate, frequency of series… o Price setting mechanisms: e.g. monopolistic behaviour (fixed price) o Transaction costs… Situational analysis is required! WFP Markets Learning Programme Price Analysis Training

Please turn to Workbook Exercise 4.2. The Marketastan File: Market Integration in Northern Marketastan (use Excel data file: 4.2. Marketastan Market Integration – Excel Data.xls) WFP Markets Learning Programme Price Analysis Training Small Group Work

Marketastan 4.2. Debriefing WFP Markets Learning Programme Price Analysis Training

Wrap-up  Integrated markets = the existence of trade flows, the movement of food in response to supply & demand imbalances, leading to cancelation of food deficits  Capturing the time dimension of market integration requires close monitoring as it evolves over time  Detailed market integration analysis is likely to help reduce the risk of price distortions by programme interventions such as local purchases, cash transfer or general food distribution  Detailed market integration analysis helps decision makers determine appropriate food assistance programme WFP Markets Learning Programme Price Analysis Training